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1. Which of the following statements, if any, is or are true?

I. As a general rule, income generated by property is not taxable tothe person who owns the property if the income is paid to directlyto another person who, prior to such payment, performed serviceswith respect to the property.

II. As a general rule, compensation with respect to the performance ofservices is taxable to the person who performed the services unlessthe compensation is assigned to and paid to a creditor of theperson who performed the services and the assignment was made priorto performance of the services.

a. Only I is true.

b. Only II is true.

c. I and II are true.

d. Neither of these is true.

2. Ramon is in the business of buying and selling securities. Which ofthe following is a capital asset for Ramon?

a. The securities he buys and sells each day in the normalcourse of his business

b. The securities he designates as held for investment at theend of the day of acquisition

c. The securities he holds more than 12 months

d. All the securities he owns

e. B., c., and d are capital assets.

3. Which of the following is not a “trade or business” expense?

a. Interest on business indebtedness

b. Property taxes on business property

c. Parking ticket paid on business auto

d. Depreciation on business property

e. All of the above are “trade or business” expenses.

4. Which of the following is a required test for the deduction of abusiness expense?

a. Ordinary

b. Necessary

c. Reasonable

d. All of the above

e. None of the above

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Elin Hessel
Elin HesselLv2
28 Sep 2019

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It is now late May 2018 and you, CPA, have just finished meetingwith your partner, Ms. Wong. Ms. Wong wants your help with someclients of hers.

One client, Garden Supplies Co. (GSC) has had a new shareholderbuy shares. Ms. Wong wants you to tell her if GSC is a resident ofCanada for tax purposes in 2018 and describe the personal taxconsequences that Mrs. Gardiner will have from her 2018 share sale.You can ignore the acquisition of control rules. Also, given thelist of GSC’s 2018 expenditures in Exhibit I, calculate the total2018 expenses that are deductible in 2018 when computing net incomefor tax purposes. GSC is very profitable and wants to claim themaximum amount of deductions possible. You do not need to commenton non-deductible items.

Note: Additional information about GSC is provided in ExhibitI.

Another client, Mr. Rich, who is a non-resident of Canada, hasjust purchased a newly built townhouse in Canada for $1,500,000that he plans to rent out. The home was purchased on May 1, 2018and will be rented out starting on July 1, 2018. What Canadianincome tax obligations will Mr. Rich face in 2018? If you have anyrecommendations that will reduce Mr. Rich’s Canadian income taxobligations (in 2018 or in future years) with respect to his rentalproperty, then you should provide them. Additional informationabout Mr. Rich is provided in Exhibit II.

Ms. Wong wants you to draft a memo to her answering herquestions. She says you can ignore provincial income taxes, ignoreforeign taxes and ignore any income tax treaties. Explain youranswers, show all your detailed calculations and give IncomeTax Act (ITA) section, subsection and paragraph (whereapplicable) references and Income Tax Regulations sectionand subsection references in order to support your answers. Whengiving references you must be specific. Do not just list multiplereferences!

Exhibit I

Garden Supplies Co.

Garden Supplies Co (GSC) is a private company that wasincorporated in Canada in 1963 by Mr. Taft. Mr. Taft subscribed for1,000 common shares in return for $100 (in aggregate). GSC does nothave any other shares outstanding

GSC has a December 31st year-end and its board ofdirectors meetings are typically held in the United States(U.S.)

GSC operates gardening supply stores in Canada and it startedwith one store in Toronto in 1963. Now it has 10 stores throughoutCanada

In 2005, Mr. Taft sold his shares to Mrs. Gardiner for $1M inaggregate (which was their FMV at the time)

In late January 2018, Mrs. Gardiner sold 600 of her GSC commonshares for $3,000 per share to Marcus Jones, an arm’s length person(she still owns 400 common shares of GSC)

In January 2018, Mrs. Gardiner paid $3,500 to a charteredbusiness valuator to value her GSC shares and paid $2,500 in legalfees related to her sale of GSC shares

The FMV of GSC was determined to be $3M

Mrs. Gardiner incurred $300 of safety deposit box rental fees in2018 and she keeps her GSC share certificates in her safety depositbox

Assume GSC is not a qualified small business corporation

Marcus Jones is a non-resident of Canada

In 2018 GSC incurred the following expenditures:

Income taxes paid of $124,500

Salary and wages expense paid of $390,000

In addition, GSC accrued a bonus payable to Mrs. Gardiner of$70,000 for work performed in 2018. This bonus will not be paiduntil May 31, 2019

Interest expense paid of $5,000 on a bank loan used to financebusiness operations

Dividends paid to shareholders of $55,000

Warranty expense accrued of $25,000 (based on estimated warrantycosts). The actual cost in 2018 of servicing warranties was$20,000

Purchased new shelving units to display merchandise on April 1,2018 for $200,000

Purchased new computer software for $3,000 on January 1,2018

Purchased goodwill for $40,000 as part of a business acquisitionon January 1, 2018

Purchased a patent, with an 18-year legal life remaining onDecember 31, 2018 for $10,000

Accrued office supply expenses of $12,000, for suppliespurchased (and used) in late 2018. Payment of this account payablewas made in early 2019

Paid $7,000 for Toronto Blue Jays (baseball) tickets used totake large customers out to games

Incurred $4,000 of legal fees related to obtaining bankfinancing, and

Incurred lobbying expenses of $1,300 for matters related to thebusiness

Assume all expenditures are reasonable unless otherwiseindicated

Assume the prescribed interest rate is 1% at all times

Exhibit II

Mr. Rich

Mr. Rich’s rental income is property income; i.e., he is notrunning a business

Mr. Rich wants to minimize his Canadian rental income and hedoes not have any other Canadian income

Mr. Rich has prepared the following (assume that all theexpenses below are paid in 2018 and are reasonable):

Mr. Rich’s Canadian Rental Income

For the year-ended December 31, 2018

Gross rental revenue ($4,000 permonth) $24,000

Mortgage interest ($2,200 permonth) $13,200

Property taxes ($610 permonth) $3,660

Maintenance and repairs ($500 permonth) $3,000

Insurance ($200 permonth) $1,200

Total expenses $21,060

Netincome $2,940

2-30 2–30. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
A a. Which of the following organizations can revoke the right of an individual to practice as a
CPA?
(1) The Public Company Accounting Oversight Board.
(2) The American Institute of Certifi ed Public Accountants.
(3) The Securities and Exchange Commission.
(4) The applicable state board of accountancy.
B b. The AICPA over time has played an important role in standards setting. Which of the following
standards are currently established by the AICPA?
(1) Accounting standards applicable to nonpublic companies.
(2) Auditing standards applicable to audits of nonpublic companies.
(3) Quality control standards applicable to audits of public companies.
(4) Standards for reviews of the interim fi nancial information issued by public companies.
C c. Which of the following does the FASB consider a source of nonauthoritative guidance for
use when there is no authoritative guidance available?
(1) The FASB Codifi cation.
(2) FASB Concepts Statements.
(3) SEC Rules.
(4) SEC Interpretive Releases
D d. Financial statement audits performed under PCAOB requirements are designed to provide
which type(s) of assurance with respect to the detection of material misstatements due to
errors or fraud?
Reasonable Absolute
1 Yes Yes
2 Yes No
3 No Yes
4 No No
E e. A basic objective of a CPA fi rm is to provide professional services that conform with professional
standards. Reasonable assurance of achieving this basic objective is provided through:
(1) Compliance with generally accepted reporting standards.
(2) A system of quality control.
(3) A system of peer review.
(4) Continuing professional education.
F f. Which of the following is not explicitly included in a standard report for a nonpublic
company?
(1) The CPA’s opinion that the fi nancial statements comply with generally accepted
accounting principles.
(2) That generally accepted auditing standards were followed during the audit.
(3) That internal control of the client was satisfactory.
(4) An identifi cation of the fi nancial statements audited.
G g. The general group of the 10 PCAOB Auditing Standards requires that:
(1) The auditors maintain an independent mental attitude.
(2) The audit be conducted in conformity with generally accepted accounting
principles.
(3) Assistants, if any, be properly supervised.
(4) The auditors obtain an understanding of internal control.
H h. Which AICPA quality control standard would most likely be satisfi ed when a CPA fi rm
maintains records indicating which partners or employees of the fi rm were previously
employed by the CPA fi rm’s clients?
(1) Professional relationship.
(2) Engagement performance.
(3) Relevant ethical requirements.
(4) Monitoring.
I i. An audit provides reasonable assurance of detecting material:
Fraudulent Financial Misappropriation
Reporting of Assets
1 Yes Yes
2 Yes No
3 No Yes
4 No No
J j. Which of the following is not included in an integrated audit report on the fi nancial statements
of a public company?
(1) The report states that the audit was performed in accordance with AICPA standards.
(2) The report indicates that the fi nancial statements are the responsibility of management.
(3) The report indicates that the auditors have also audited the effectiveness of the company’s
internal control.
(4) The report is signed in the name of the CPA fi rm.
K k. Audit fi rms that are subject to inspections by the PCAOB staff include:
(1) All audit fi rms.
(2) Audit fi rms that are registered with the SEC.
(3) Audit fi rms that are registered with the PCAOB.
(4) Audit fi rms that are registered with a state board of accountancy.
L l. Which of the following is not a difference noted when comparing the AICPA audit report
to the international audit report?
(1) The international audit report may use the phrase “true and fair view.”
(2) The international audit report may be signed using the personal name of the audit
partner, the audit fi rm, or both.
(3) The international audit report requires inclusion of the city of the CPA fi rm offi ce that
performed the audit.
(4) The international audit report includes an opinion on internal control.

Roger Wilde is a CPA. He has numerous clients, one of which is Wedding World (WW). WW is a full service bridal consulting firm and is interested in buying Wedding Wonders Photography Studio (WWPS). WWPS uses the cash basis of accounting. Roger has been retained to help WW acquire WWPS, and you are a staff accountant working for Roger. Begin by evaluating the following facts for June.

Revenues WWPS provides a complete wedding-day package for $2,950. The package requires a $1,000 down payment at the time the contract is signed, a $1,200 payment on the date of the wedding, and a final $750 payment 30 days after the wedding. The company uses a mobile digital processing lab and is able to deliver a complete wedding portfolio at the close of the reception on the wedding day itself! Seventy-five weddings were photographed during June. All of these events were booked in earlier months. During June, an additional 92 weddings were booked for future months. Final payments were received during June for 47 weddings performed in May. None of the June weddings resulted in the receipt of the final payment before July 1, but full payment is expected.

Expenses During June $70,000 was actually paid for wages. Accrued wages at the beginning of the month totaled $12,000. At the end of the month, $23,000 was owed to employees. At the close of June, the WWPS bought new photography equipment for $13,000. Entering June, WWPS owned equipment with a total cost of $700,000. This equipment has an average life of 50 months. Supplies on hand at the beginning of the month totaled $123,500 and $76,000 was expended for supplies during the month. Supplies on hand were $81,200 at the end of the month.

(a) Prepare a cash basis income statement for June. Preliminarily, WW is willing to pay a price equal to 75 X June’s monthly income.

(b) On further review of the facts relating to WWPS, Roger suggested that a fair offer should be based on accrual basis income. Calculate accrual basis income.

(c) What is the proposed purchase price? What is the value of utilizing a CPA to assist in the business decision process?

(d) As a general rule, could a CPA like Roger give an unqualified audit opinion on the cash basis financial statements? Why or why not?

(e) Why might some businesses that are not required to follow GAAP use the cash basis?

(f) What is the modified cash basis of accounting? I-03.07 Cash and accrual-basis

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